The ECB is edging, albeit slowly, towards a less accommodative policy and analysts at TDS think that the impact of any such moves by the ECB will have on EM is not principally through a fall in global risk appetite, but rather through the impact that it has on EURUSD.
“For much of last year, the pick-up in Eurozone growth combined with expectations of tighter ECB policy has caused EURUSD to rally strongly.”
“This rally has had consequences for the pattern of EM returns so far this year. The total returns for a EUR-funded investor, have, unsurprisingly, been best in EMEA, with its more EUR-linked currencies, albeit close to zero. Returns have been worst in Asia, with its more USD-linked currencies, with a TR of about -3.0%.”
“We remain positive on EURUSD, although we have revised our expectations slightly lower. While we think it is unclear whether in aggregate EM FX will appreciate against EUR, we think the pattern of returns we have seen so far this year, namely with EMEA outperforming and Asia underperforming, is likely to persist outside of periods of rising risk aversion and dollar re-strengthening, when Asia FX plays its safe haven role as usual.”